If you are looking to get into property investing or move up to the next rung of the ladder, here are some words of advice on how to invest in property
Property investment is simple, but not easy – and that’s not a play on words.
- Select the right properties,
- In the right areas
- That produce the right return.
Getting an Easy Education in Property Investment for Beginners
Property investment can be a pretty terrifying thought. There’s a lot of money involved and some truly frightening horror stories circulated by the media about “property deals gone wrong”.
We’re here to tell you that buying investment property is just like most other things you spend money on… It helps to have a little understanding before you commit to spending your cash!
Most people wouldn’t buy the very first TV or computer that came along… they’d do a bit of research, talk to friends and experts, read reviews and get a bit of an understanding so that they can make the best decision possible when they do buy.
Believe it or not, investing in property is just the same.
Safe as Houses
The most significant difference between property and other forms of investment over the last century is that many of the properties upon which all of the statistics and numbers are calculated still exist today.
That can’t be said for many companies that form the basis of share-based returns. Companies and jobs that exist today can simply be made obsolete tomorrow.
So, why invest in property?
Unlike shares, property is a tangible asset that won’t vanish as a result of poor management, disruptive technologies or obsolescence. As building and labour costs continue to rise, so will land and property values.
Is Property Investment Future-Proof?
When you invest in property, the rental income you receive from that property lets you to borrow and gain the benefit of leverage by helping you pay the interest on your mortgage.
Over the years the rental income received from property investments has increased at a rate that has outpaced inflation.
Will this continue in the future?
Well, statistics show that the level of home ownership is slowly decreasing in Australia.
Interactive visualisation courtesy of – The Sydney Morning Herald
There are a number of reasons for this. In particular, as property prices keep rising, fewer people are able to afford their dream homes.
Together with higher rentals, it means that many first home buyers have been hit with a “dual disadvantage” – making the great Australian dream of owning a house just that for many – a dream.
We know that the government is having difficulty providing public housing, which means there will be plenty of opportunities for landlords to obtain a return from residential property investment.
This is particularly true if you own a property that will be in demand by tenants of the future.
The Property Cycle
When and Where Should You Buy an Investment Property?
By understanding the property cycle, you increase your ability to create a positive return from your property investments.
At Domani Investment we understand that properties don’t increase at a static rate. They move in an upward growth pattern which is typically followed by a fall.
Normally the fall is higher than the last, and then there may be short periods of no growth. The cycle repeats itself as per this illustration.
Using the Property Cycle for Fastest Growth
The BIG question for all investors wishing to grow a portfolio is when do you buy to get the fastest growth?
The secret is to observe the rental markets in the areas you wish to purchase. Rent after all is the determining factor when it comes to maintaining your investment and of course realising an income from the property.
Rent is a charged at a percentage of the property’s value, so if rents are increasing the value of the property is increasing. And if rents are decreasing then the property values are decreasing.
The advisors at Domani Investment will assist you in purchasing properties at the bottom of the growth cycle, as we know what follows is the growth phase.
It is this approach that enables our investors to get the consistent increases in growth and of course rents, which increases the ability for our clients to grow their portfolio and to minimise the costs.
Putting Property and Superannuation to Work for You
Australia’s love of property is well documented. To a lesser extent, so too is the increasing number of people who think they can do a better job investing their superannuation than the professionals.
It’s not surprising therefore that the number of people combining property and superannuation and using a self-managed super fund (SMSF) to invest in direct property is growing steadily.
Does combining Property and Superannuation make sense?
But before deciding on a final stand, there are a number of issues that demands consideration..
While successful property investing can be challenging enough in the current and prospective market climate, holding a property asset in an SMSF only adds a layer of extra complexity.
Restrictions on Property and Superannuation
Superannuation law imposes a range of rules and restrictions that don’t apply when investing in property outside super.
For example: SMSFs can’t be used to buy residential property from any member or related party, but only from the open market.
Funds members and relatives living in residential property will be judged as an offense and serious breach of our code to serve people with impartiality. This test also imposes a limit on the extent to which SMSFs can enter into lease arrangements and certain other transactions with related parties.
The trustees must formulate an investment strategy that is specific and suitable to the whole circumstances of the fund. This includes factors such as the members’ age, risk profile and retirement objectives, as well as the need for diversification.
Moreover, plans should also be made to address the lack of asset diversity over time.
Wondering if using a Self Managed Superannuation Fund to invest in property is the right thing to do?
Consider the fund’s capacity to meet current and future expenses, such as insurance premiums, property repairs and maintenance, tax liabilities and interest payments (if an LRBA is established) before deciding and reaching any conclusion.
In case of the rental income failing to meet ongoing liabilities, the trustees will need to ensure that either the fund holds sufficient cash or the members have capacity within their caps to make additional superannuation contributions.
SMSFs intending to invest primarily in direct property should also consider how they would deal with having to pay out a sizeable portion of the fund’s value.
This could occur if a member decides to exit the fund and wants to rollover their benefit.
Other scenarios could include if a member divorces, suffers a total and permanent disability or passes away.
If the property has to be sold to fund a benefit payment or rollover, it may take a while to find a buyer, the selling price may be lower than anticipated and the return on capital may not meet the member’s or fund’s expectations.
SMSFs that hold large lumpy assets like property should consider insuring the members in the event of death or TPD, if allowed in the trust deed.
Not only can this be a cost-effective way to fund the insurance cover, it can help ensure a ‘fire sale’ isn’t required to pay a death or disability benefit.
Repairs, improvements and replacements
Before using an LRBA to acquire a property in an SMSF, it’s important to be aware that while the property can be repaired or maintained using some of the borrowed money, improvements can only be funded using cash-flow, other fund assets or additional contributions.
Also, it is generally not possible to replace or redevelop a property that is subjected to an LRBA . This is because if work is done that fundamentally changes the character of the property, it can no longer be held in the existing LRBA .
A key exception is where a property that is severely damaged or destroyed by events such as flood or fire is replaced with a like property using the proceeds from an insurance policy.
For example, replacing a destroyed four-bedroom house with a similar four-bedroom house would generally be considered acceptable, whereas building two townhouses with two bedrooms in each would usually not.
These concepts are discussed further in the ATO’s Self Managed Superannuation Funds Ruling SMSFR 2012/1 – Self Managed Superannuation Funds Ruling SMSFR 2012/1.
Property and Superannuation the
Investing in property through an SMSF could be a worthwhile and rewarding strategy.
However, you should most probably avoid this option if you wish to buy a residential investment property for your own enjoyment or want to start a property development business through your SMSF.
Furthermore, even if the investment is made for the right reasons, cash-flow problems could arise if the property is untenanted for a significant period, or a large sum of money needs to be paid out and there isn’t sufficient liquidity available.
Naturally in all matters of finance, investors are encouraged to seek expert legal, taxation and financial advice before undertaking this strategy.
At Domani Invest, we provide our customers with all the tools and information to ensure the investment journey is not only smooth , but well informed.
As a group, Domani would rather not sell an investment property to a customer that is not informed or committed to the property investment cycle and objectives.